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Downgrading the Cyprus Economy

By Antonis Loizou, FRICS
Antonis Loizou & Associates Ltd
Chartered Surveyors
Property Valuers - Project Managers

5 June 2011

Over the recent months and as early as last week, the Cyprus economy was downgraded by the international evaluators by 3 points. The main reason being the exposure of the Cyprus Banks to Greece (for the Greek Government bonds which is debatable if they can be repaid on time and in full) and the inaction of the Cyprus Government regarding its carefree spending, with special reference to also unsolved issues, such as the retirement age, the pensions funding and the constant handouts to the needy. The Government (“communist”, according to our President, but mainly old socialist in terms of economy management) has not been able to grasp the global situation and how serious the downgrading is. The Government from its inherited €500 mil. excess, when it took office 2½ years ago, is now well under the €3 bil. mark debt, which caused its borrowing capability to be downgraded. So the Cyprus Government from its original 3.5% borrowing basic rate in the initial months of its governance, have shot up to almost 6½%. This will inevitably increase local borrowing rates, with negative results for building loan seekers and thus demand for real estate will drop. What is more worrying is that if Cyprus seeks the Europe’s financial help, rest assure that the latter will place conditions, including the increasing of the 10% taxation to the 17% level (as suggested by Germany and France) see Ireland’s example. If this happens the Russian and other foreign funds and money deposits will flee Cyprus, causing the Banks to have a liquidity problem and again, thus, increase the lending rate, whereas money deposits in the Cyprus Banks may flee of fear of the banks to go under. Bailing out by the Cyprus Government of the banks (something which has happened in the U.S.A. and Britain) is not a solution for Cyprus, since the Government in Cyprus does not have the capability of doing so.

Are we then being left alone in the hands of this “socialist” Government which seems to be doing nothing or are we being alarmist? There is some hope partly from the newly elected House, where all parties have declared their priority to examine in depth the Cyprus economy and exert pressure on the Government to take action. All parties other than the “communist” one are worried, since unemployment is on the rise, reaching the level of 7% (unknown by Cyprus standards) and this from its 2.9% unemployment over the previous 2½ years. Cyprus has been lucky during economic crisis in the past based on the misfortune of others. Initially the Lebanon civil war, then the Yugoslavian and more recently the Russians have helped out. Now with the political upheaval with the Arab states, tourism seems to be picking up and even the alcoholic poisoning of Russian tourists in Turkey will help us, with Russian tourist turning their attention to “safer” places. Mid term, we expect that gas will be found offshore of Cyprus and if this is correct and with the expectation of bringing the gas in Cyprus by the year 2014, there is a possibility of hope. But, are we serious? Is this the way to look upon our economy based on day to day circumstances and on the misfortunes of others? We are not, we hope, alarmist but it is better to raise our voice now then cry later and with no help from anywhere.

Coming back to the real estate market, we hereby provide for your consideration the following, which is indicative of the economic situation both locally and European.

The above table shows that out of the total sales of the year 2010, 19% were foreign buyers and for the year 2011 27%. The drop in local demand is indicative of the worsening economic situation in Cyprus, whereas the increase in foreign demand shows the increased interest from the Russian market.